The Best Method to Calculate Compound Interest for Your Bank Exam

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Questions on Compound Interest, which are asked in quantitative aptitude, are considered to be complex by most students. But, as Rohit Agarwal, the faculty at TalentSprint for the quantitative aptitude segment explains, solving such problems is easy once you know the best way to make the calculation.

About Compound Interest

All learners know well, that from the second year onwards, the calculation of compound interest involves calculation of interest not only on the principal invested but also on interest earned during the preceding years.

The Formula

The formula for computation of compound interest is P (1 + r/100)T – P, where P is the principal, r is the rate of interest in % per annum, and T is the time period in years. This is the well-known formula learned while studying mathematics in high school and does not involve rocket science.

Example:

Where P = Rs.12,000/-, r = 10% per annum and T = 2 years, what would be the compound interest at the end of 2 years?

The Conventional Method of Calculation:

The traditional way to calculate compound interest would be to apply the given formula. Substitute the given values in the places of P (12,000/-), r (10/100) and T (2) and then arrive at the answer. There is no doubt whatsoever, that such a process would result in the calculation of the right answer. But the process would involve 4 to 5 steps making it complex, tedious and time-consuming. Remember that in exams for recruitment to a bank, time is always at a premium and the objective should always be to solve problems in the shortest possible time. What is the best method to do that?

The Best Method

Rohit Agarwal recommends that you adopt the effective percentage method by using the formula – Compound Interest (for 2 years) = a + b + ab/100, where a is the rate of interest in % for the first year and b is the rate of interest in % for the second year. Summing up that gives you:
a = 10 (interest for the first year)
b = 10 (interest for the second year)

The effective compound interest works out to 21% (10 + 10 + 10*10/100). The compound interest at the end of 2 years is 21% of Rs.12,000/- which works out to Rs.2,520/-. The video urges learners to do such calculations mentally to arrive at the answers. There will be multiple choices so the important thing is to calculate cleverly so as to zero-in on the right option.

In this case, 21% of Rs.12,000/- can be calculated by using the method of ‘split and merge’. Split 21 into 20 + 1 and calculate. 20% of Rs.12,000, which is Rs.2,400 and 1% of Rs.12,000, which is Rs.120. Merge by adding Rs.2,400 and Rs.120 to arrive at Rs.2,520 which is the right answer.

Watch this video:

for expert advice, that is custom designed for candidates seeking to make a successful start to their bank exams.